Capital work

Board meetings of the Securities and Exchange Board of India have become eventful affairs, with the regulator announcing a long-list of proposals and rule tweaks after each meeting. The latest meeting was no different with SEBI attempting to address some critical issues faced by a bevy of stakeholders including debt fund investors, commodity exchanges, start-ups and foreign portfolio investors. The problem being faced by debt-fund investors is probably more exigent. The recent case of the IL&FS group defaulting on its debt and other such instances involving Amtek Auto and JSPL had resulted in large losses to the investors in the recent past. SEBI’s decision to allow mutual funds to segregate fixed-income securities, whose value is marked down sharply due to certain credit events, into side-pockets will provide respite to investors. When the written-down security is finally sold, the value can be credited to the holders who own the side-pocket. SEBI has said that use of side-pockets is optional for fund houses and approval of trustees needs to be obtained before it is followed.

Against the backdrop of the liquidity crunch being faced by non-banking finance companies and housing finance companies, there are also concerns that fund houses might not be assigning the right value to the bonds and other debt securities issued by these companies. The Board’s decision to prescribe guidelines for pricing corporate bonds, to be followed by all fund houses, is therefore welcome as it will ensure that such portfolios are rightly valued. The proposal that the Department of Economic Affairs will try to bring uniformity in valuation of debt portfolios across mutual fund, insurance and pension funds should help restore investors’ trust in all these investment vehicles. The Board made yet another attempt to resuscitate the institutional trading platform intended to help start-ups raise money. The platform has been re-named Innovators Growth Platform and rules dealing with the holding of pre- and post-issue capital, the size of the minimum application and trading lot and minimum number of allottees have been overhauled. SEBI has also allowed companies listed on the IGP the option to trade under regular category, after a year of listing. While the changes might attract some companies, SEBI needs to keep a close watch on this segment. Expanding the list of companies eligible to do offers for sale, to include all companies with market capitalisation over ₹1,000 crore can help the promoters raise money that can be used in their other businesses. This move will also improve liquidity in the stock market.

Foreign portfolio investors will heave a sigh of relief at SEBI’s decision to not apply prevention of money-laundering rules in determining beneficial owners of FPIs. There were fears that stringent application of these rules could lead to liquidation of some FPI funds. The move to allow custodial services in goods underlying for commodity derivative contracts will help convergence of spot and future prices. Commodity exchanges can move towards a delivery-based contract model.

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